Page 256 - A Canuck's Guide to Financial Literacy 2020

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• Sell-Side Hedgers

Sell side hedgers would be concerned about the falling prices of the underlying
commodity. Sell side is an investment banking term and a section of the financial
markets that deal typically with creating, promotion and selling of publicly listed
securities.

• Merchandisers

Merchandisers are parties who engage in the process of buying and selling
commodities. Merchandisers use two types of hedges, a short hedge and a long
hedge.

o Short Hedge - Short hedges are used to offset cash losses when prices
fall. For example, a merchandiser would sell a futures contract when
they're concerned the underlying asset would fall.
o Long Hedge -Long hedges are used to offset cash losses when prices
rise. They would buy futures contract when they believe prices would rise.

Forwards vs Futures

We’ve mentioned before that future contracts are not the same as forward contracts.
Although both investments allow you to buy or sell an asset a specific time at a given price,
it’s important to note that forward contracts do not trade on a standardized exchange as
futures do, but rather over the counter. Future agreements are negotiated through an
exchange while forward contracts are private agreements with terms agreed between the
two parties.

In regards to settlement, future contracts settle everyday, making them highly liquid in
comparison to forward contracts that settle upon maturity. The parties to a forward contract
bear more risk considering that there is no clearinghouse that guarantees performance and
completion of the contract. If a party to a forward contract were to default, they may be
liable to lawsuits by the other party.